Value-based Management of Financial Institutions
Tom Wilson, Ph.D.; Lu Li
Although the benefits of insurance may be obvious to the policy holder when the earth shakes or the wind blows, how insurance companies and banks create value for shareholders is often times less transparent. Similar to an industrial corporation, banks and insurers need to focus on securing profitable growth opportunities and achieving cost efficiency. However, financial institutions are different from industrial corporations in three important ways: the products we sell involve risk, implying that our “cost of goods sold” only becomes clear over time; we create value for shareholders and our customers by underwriting and managing that risk; and, finally, the risk as well as regulatory and rating agency considerations play a key role in defining our capital structure. These differences make financial institutions inherently more complex, a situation which is not helped by traditional accounting rules.
This course focuses on how to manage financial institutions for value with a deeper focus on insurance. During the course of the seminar, a valuation framework including key value drivers will be developed for insurance and banking businesses. In addition, generic management actions or “rules of the game” will be developed for creating value through profitable growth, cost efficiency, underwriting excellence and capital efficiency. In this context, the role of balance sheet management, risk management and strategic planning will be discussed.
In the middle of the Semester, seminar participants will be asked to present an outside-in valuation of an actual insurance company based on public information. At the end of the Semester, seminar participants will be asked to present a strategic plan to “management” on how the company can increase its value. The both presentations will be made to industry executives who will evaluate the conclusions and provide feedback.